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06 September 2016

The development of our country #nlpoli

Today, the development of Churchill Falls is popularly perceived as a failure. Newfoundland is portrayed as the victim of a shrewd and untrustworthy lot in Quebec. They hoodwinked Joe Smallwood, the Liberal premier of Newfoundland at the time, and have continued to steal from Newfoundlanders through the patently unfair 1969 power contract.

The Churchill Falls power plant cost a little over $1.0 billion (about $6.1 billion in 2015) to build between 1969 and 1971. With an installed generating capacity of almost 6,000 megawatts, it was one of the largest if not the largest hydroelectric plant in operation at the time.

Churchill Falls (Labrador) Corporation delivered the project on budget, achieved initial operating capacity five months ahead of schedule and finished the whole project a year ahead of schedule.

Revenge for the humiliation of Churchill Falls remains at the centre of provincial politics, as it has since the late 1970s. Redress of the grievance has been the most common term for the political goal of the Newfoundlanders, but as Danny Williams and the provincial Conservatives made it out in 2010, revenge was really their burning passion. Muskrat Falls was not merely Williams' legacy. It was the means by which Newfoundlanders would break what he called Quebec's stranglehold on his province's economic future in Labrador.

In this pair of posts, we will look first at Churchill Falls. The second, coming tomorrow, will look at the years since 1972, culminating in Muskrat Falls.
"As a Province of Canada," Joe Smallwood told his fellow countrymen in their first election in almost 20 years, "Newfoundland will be either a glorified "poor-house" with most of her people depending to largely on ... cash payments from the Government of Canada or else a growing, prosperous province of independent families."

Smallwood declared that the "first great undertaking" of his Liberal administration after the 1949 general election would be the economic "development of our country, both Newfoundland and Labrador." Smallwood and the Liberals would find out what natural resources there were in the province, advertise them to the world and "bring new capital in to open up our country and give jobs to our people."

Private capital was essential because the government of Newfoundland and Labrador did not have the means to develop the resources on its own. Confederation had taken away most of the national debt that had broken back of self-government in 1934. Smallwood's administration had a tidy surplus in 1949 and the promise of a decade of federal transfers in addition to the money flowing in to families in every cove, harbour, and town. But the government had much to do in the way of roads, water and sewer services, and electrification to give the new province the basic infrastructure on which development could take place.

The government also lacked a diverse and professional bureaucracy. Before 1934, the public service was addled by patronage. The Commission had made great strides to put the public service on a solid professional footing and in 1949 it turned over to the newly elected government a cadre of dedicated men and some women. But there were few of the professionals any of the other provinces in Canada could take for granted. There were no economists, for example, on the government payroll.

In Labrador, the new government faced a particularly great challenge. The Judicial Committee of the Privy Council had only settled the boundary dispute between Newfoundland and Canada a few short years before Newfoundland surrendered its government to a commission appointed by the British. Aside from a few settlements along the coast and the new airfield at Goose Bay built in 1941, what most of the interior held was a mystery to all but the few Innu who traveled rivers, streams, and forests. Whatever anyone could develop in Labrador was, as Smallwood said, something that first had to be found.

The British Newfoundland Corporation - BRINCO - was a consortium of initially seven British business concerns that held rights to develop the natural resources of Newfoundland and Labrador. Organized in 1952 and formed in 1953, BRINCO first turned its attention to the hydro-electric potential of what was then known as the Hamilton River. Industrial development, like the new iron ore mine at Wabush, would need large amounts of electricity on top of that needed by the neighbouring Iron Ore Company of Canada operation. A survey conducted in 1956 confirmed the potential of the Hamilton River. BRINCO former the Hamilton Falls Power Corporation in 1958. Between 1960 and 1963, BRINCO and its partners IOC and Wabush Mines built a generating station at Twin Falls, along with a new reservoir to supply the water it needed. The corporation they formed to develop the project was called Twin Falls Power Corporation or TwinCo. It would mothball its plant in 1972 as part of a deal with Churchill Falls (Labrador) Corporation, as Hamilton Falls corporation became in 1965, to maximise the water available for the larger generating station.

Churchill Falls would have produced far more power than even the host of industrial developments envisaged in the heady days of BRINCO's formation. A development at the Falls would need other customers. The best markets for a power plant in Labrador were Quebec and Ontario, in the first instance, with the Maritimes and New England a close second. As Ray Blake notes in Lions or Jellyfish, changes to federal regulation in 1962 opened up the prospect of long-term power sales to the United States.

This gave BRINCO renewed enthusiasm for a maximum development at Churchill Falls. Hydro-Quebec, the newly formed Crown corporation in Quebec, was interested in Churchill Falls as part of its plans to meet domestic needs after 1968. If they bought all of Churchill Falls' eventual output, they could use what they needed domestically and export any surplus.

Blake makes much of a proposal by the Conservative administration of John Diefenbaker to develop a national electricity grid. This was a missed opportunity, according to Blake, for Newfoundland to have developed Churchill Falls using federal capital. Instead, Smallwood chose to play at a disadvantage, putting great stock in the partisan and personal connection between himself and Liberal Jean Lesage in Quebec in the early 1960s.

Blake's assessment places too much emphasis on one element of Smallwood's approach to politics and ignores the other issues. One of the most important was Smallwood's nationalism. Too many writing and commenting since 1976 assume that the pseudo-nationalist movement that emerged in Newfoundland in the later 1970s is the only Newfoundland nationalist view that has ever existed.

Smallwood opposed the idea of a national grid for the same reason as Lesage and other Quebec politicians did. The idea represented an unwelcome interference by the federal government in an area of provincial jurisdiction. Smallwood meant what he said at the start of construction at Churchill Falls some years later: this was provincial water and provincial land. This was essentially what Smallwood had said in 1949 about developing the natural resources of his country, Newfoundland.

Rejecting federal interference was no different for Smallwood than rejecting the idea of nationalising BRINCO would be a few years later, when Quebec Premier Jean Lesage floated the idea. As Richard Gwyn notes inSmallwood: the unlikely revolutionary, Smallwood would not agree to such an approach that would, inevitably, give Quebec the commanding position.

Others have summarised the discussions with Hydro-Quebec through the 1960s and ending with the 1969 contract. There are three points worth noting. First, price was an issue from the outset. BRINCO, concerned to secure the best price, took as its starting position $3.00 per megawatt hour. Hydro-Quebec, equally concerned to secure the best price, started at $2.00 per megawatt hour. The amounts finally included in the 1969 contract were within the range always contemplated by the two companies throughout the negotiations and were consistent with the market, at the time.

The negotiators at BRINCO were constantly trying to bring their product to market at a cost that would be profitable in the cost environment at the time. They had to sharpen their pencils. They had to control costs. But the point must be borne in mind that they found a way to make the project profitable at what today seems like absurdly low prices.

The potential for sale to Consolidated Edison in New York never came to fruition for two reasons and these are the other points. There was the technical problem of long-distance transmission of electricity and connecting the Hydro-Quebec grid into the Consolidated Edison grid. Philip Smith (BRINCO: the story of Churchill Falls) also notes a problem in New York with Consolidated Edison and the legal and financial problems associated with developing a corridor for running the power through New York state to Manhattan.

This problem was tied intimately to another, namely the cost involved in exporting electricity beyond Quebec. BRINCO was never able to get electricity to the border of New York from Labrador or from Labrador to Boston via the so-called Anglo-Saxon route at a cost that Consolidated Edison was prepared to pay. This is hardly surprising. The line from Labrador to New England would have to include two water crossings, first at the Straits of Belle Isle to Newfoundland and then across the Cabot Strait to Cape Breton before carrying on through New Brunswick, Maine, Vermont, and New Hampshire before getting to the delivery point at Boston.

Hydro-Quebec's interest in Churchill Falls was in supplying the domestic market primarily. Their insistence on a low price was to ensure they could meet their legislated requirement of supplying low-cost electricity for domestic use, whether in households or in industrial development. Hydro-Quebec had a great deal of domestic generating capacity, much of it built in the 1930s and 1940s. This is the most likely source for exports into the United States since the cost of production at those plants was lower. Those plants were also closer to the American border, which meant that transmission costs were lower. The situation is analogous to Nalcor's plan in the Emera contract to supply its Nova Scotian commitment out of the older Central Newfoundland complex of Bay d'Espoir and Exploits rather than ship it all the way from Labrador via both high voltage direct current and alternating current lines.

Much has been made since 1972 of the prices in the 1969 contract and in the automatic renewal contract. There is no question that they were competitive for the time. As Smith notes, BRINCO officials believed, as did many others, that the largest competitive threat they would face in the market would be from nuclear generators. They would be able to generate effectively limitless electricity on demand, something hydro generation could never do. Plus nuclear generation could generate electricity for prices at or below the prices Hydro-Quebec and BRINCO were talking about.

No one who signed the power contract in 1969 could have foreseen the 1973 oil crisis. More importantly, none of them could have foreseen the environmental movement that rejected nuclear power generation. And certainly none could have anticipated the Three Mile Island crisis in 1979 that put paid to nuclear power.

In a 1977 interview with CBC Radio, Philip Smith , Joe Smallwood, John Crosbie, and an unidentified individual discussed the controversy over the price Hydro-Quebec pays for electricity from Churchill Falls. It's worth noting that Smith estimates the cost to Hydro-Quebec at about $8.00 per MWH since HQ assumed the cost of the transmission facilities for the power. That is still an absurdly low price compared to $25 to $30 a megawatt hour electricity wholesales for these days in New England. But in the 1960s, Consolidated Edison was offering $5.00 per MWH. That HQ cost is what BRINCO would have had to do in order to get power to New England without Hydro-Quebec in the 1960s.

BRINCO and Hydro-Quebec continued to negotiate the final contract for power from the Churchill Falls plant even as the company started work on the site. BRINCO had the engineering capability to build the project through its engineering team comprising ACRES and Bechtel. What BRINCO didn't have was the financial means to guarantee completion of the project. The bondholders demanded a guarantee and Hydro-Quebec provided it, in exchange for the automatic renewal provisions of the 1969 contract.

BRINCO had evolved a relationship with Hydro-Quebec over the course of a decade. It was not an easy relationship but it was one that worked. Had BRINCO rejected the renewal, they'd have never built Churchill Falls. In the preceding decade, BRINCO had figured out how to make money at the price in the main part of the contract. By the time of the automatic renewal, BRINCO officials knew the original development costs would have been covered. In the world they knew, the prices were likely to be competitive.

One of the things that hampers our understanding of the Churchill Falls development is the relative scarcity of research into the Newfoundland perspective before 1969. The most recent academic work on the development - Blake's Lions or jellyfish - can speak in detail about the Quebec side of the talks. But on the other side, Blake tends to rely on what are little more than assumptions based on the pseudo-nationalist interpretation rather than a detailed, rounded assessment of the Newfoundland position and that of BRINCO at the time. Others, like Jim Feehan and Mel Baker have written about the automatic renewal clause but in many ways their conclusion is coloured by the post-1976 pseudo-nationalist consensus among Newfoundland elites than on a thorough examination of actual government policy and objectives.

It should be be instructive that when someone subjected an old chestnut of the anti-Smallwood, anti-Churchill Falls consensus to a test, the evidence did not support it. The imaginary power corridor will be the start of Wednesday's post.